The Federal Energy Regulatory Commission (“FERC”) has issued a policy statement seeking comments on a proposed policy to address the allocation of capacity for new merchant transmission projects and new nonincumbent, cost-based, participant-funded transmission projects. Comments are due by September 24, 2012. FERC proposes to allow developers to allocate 100% of the transmission capacity of their projects through bilateral negotiation. FERC’s objective is to ensure continued transparency in the capacity allocation process and thereby prevent undue discrimination in the capacity allocation process while affording developers the flexibility to negotiate bilaterally for the full amount of transmission capacity. Developers would no longer be required to offer all customers the same terms and conditions in a rigid open season process. Rather, under the new proposed policy, developers would have flexibility during the capacity allocation process to negotiate important terms and conditions on a bilateral basis with individual anchor tenants thereby providing developers with the ability to address their unique needs and those of their potential customers.

In the Policy Statement, FERC proposes to streamline its capacity allocation policies, which have evolved through numerous petitions for declaratory orders that merchant and nontraditional transmission developers have filed. Currently, FERC evaluates merchant transmission based on a four-factor analysis developed in Chinook Power Transmission, LLC (“Chinook”). The four factors are: (1) the justness and reasonableness of rates; (2) the potential for undue discrimination; (3) the potential for undue preference, including affiliate preference; and (4) regional reliability and operational efficiency requirements. Under the Chinook analysis, FERC relies upon an open season for the initial allocation of transmission capacity and a post-open season report to ensure transparency and prevent undue discrimination. In Chinook, FERC, for the first time, also permitted developers to allocate some portion of capacity through anchor customer presubscriptions, while requiring that the remaining portion be allocated in a subsequent open season. Since Chinook, FERC has ruled on several similar proposals, including a request to allocate up to 75% of a transmission project’s capacity to anchor customers. FERC has also permitted participant funding of transmission projects by both incumbent and nonincumbent transmission developers; however, in the Policy Statement FERC notes a clear distinction between incumbent and nonincumbent developers and does not propose to extend permission to incumbent transmission owners to allocate transmission capacity on a purely bilateral basis.